Leaders-Laggards

In a market that’s been rotating between growth and cyclicals, it’s impressive that healthcare has become the 2nd best performing sector year-to-date. The volatility over the past couple of weeks in utilities could be signaling an imminent return to short-term risk-off conditions. The fact that small-caps are at least moving sideways relative to large-caps provides some hope that traditional market behaviors could be normalizing.

If we get a second round of inflation here, we’re likely to see a repeat of 2022 - growth, tech and tech-adjacent areas of the market turning into deep underperformers. There are a lot of risk factors in junk bonds that are likely to eventually hit and the fact that spreads are incredibly low at the moment only accentuates the downside risk. Lumber prices are continuing to hold up here, but so is gold.

While the current environment has been great if you’re overweight tech stocks, it’s been a very bad sign for overall market health. The market is pricing in a nearly best case scenario for junk bonds and the risk/reward tradeoff keeps looking worse. While a straight line rally in the dollar is unlikely to continue, it does seem likely that strength will remain with the greenback for a while.